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Brexit: A storm in a teacup?


Rachel Parkes

The unexpected Leave vote in the UK’s EU membership referendum left global markets reeling, but is the UK renewables industry safe? Rachel Parkes reports.

As the UK woke up on 24 June 2016 to the news that the referendum on the country’s EU membership had delivered a marginal Leave vote, the UK’s renewable energy industry could have been forgiven for choking on its toast. The EU, after all, has been at the forefront of global efforts to promote renewable energy and for an industry that has faced increasing ambivalence from the UK government in recent years, Brussels’ stated policy goals have acted as a reassuring political and legislative safety net.

Now, however, that safety net has been thrown into jeopardy. Gone is the certainty of the EU’s Renewable Energy Directive, which mandates a Europe-wide 20% renewable energy target by 2020. Gone is the assurance of the UK’s participation of the EU Emissions Trading System (ETS). Gone is the certainty that the UK will be a signatory to the Paris Agreement as part of the EU.

Prior to the vote, the press was awash with dire predictions from pundits and experts alike, warning of the perils of a Brexit vote on the UK’s climate change ambitions.  However, German turbine manufacturer Siemens, which operates a manufacturing hub in the town of Hull, was the only high-profile renewables player to openly state its position in favour of the Remain camp.

And when the result came, it was Siemens that delivered the first blow, announcing that it would be freezing its plans to export offshore wind turbine machinery from Hull. Speaking just days after the result, CEO Juergen Maier said that although it had no plans to close its existing facilities in Hull, the company would not sign off on new investments until the UK has cemented the terms of its new relationship with Europe.

 “Those plans were only beginning to happen and I expect that they will stall until we can work out exactly what the [UK government’s] plan is, how we can participate in EU research programmes, and until all the issues around tariffs and trade have been sorted out,” he said.

Despite this, however, industry reports a mood of cautious optimism.  “I don’t think the renewables industry is any different from any other industry,” says James Court, head of policy and external affairs at the UK’s Renewable Energy Association (REA). “Obviously it came as a shock and obviously people have had to re-evaluate their business models but the REA now has to [carry out a] regulatory audit to see what impact that has on day to day running of the businesses, as well as trying to ensure that we get some positive outcomes from the [Brexit] negotiations.” 
 

Risky business
 

Looking ahead, there are now a number of post-Brexit risk factors for UK renewables developers and producers.  First and foremost is the policy risk.  At present, UK renewables policy is guided by targets set out under the EU’s Renewable Energy Directive which mandate that the country meet 15% of its energy demand from renewable sources by 2020, including a mandatory 10% for transport. Without the Directive, government would be free to remove incentives for renewables and choose an alternative route to meeting its wider climate change targets, such as through nuclear power or carbon capture and storage-fitted gas-fired power.

However, speaking to parliamentary committees earlier this month, energy minister Andrew Bourne said that the government was still planning to meet the 15% target, and is “likely” to introduce the E10 biofuel-petroleum blend to UK petrol pumps in order to meet the 10% transport target.

In addition, Amber Rudd, then energy minister, took to the podium post-Brexit to reaffirm the government’s commitment to the Climate Change Act 2008, UK legislation made independently of Brussels, which commits the UK to reducing its carbon emissions by 80% by 2050. This re-affirmation was then compounded by the government’s decision to approve the UK’s fifth carbon budget.

Rudd also confirmed that the UK would stand by the commitments it made as part of the EU during the COP21 talks, saying that the country would “deliver on the promises made on Paris” and that the UK would “not step back from international leadership”.

Both these ministers – and indeed the Department of Energy and Climate Change – have since been reassigned as part of a post-Brexit government shake-up, but experts seem broadly optimistic that the present government will stick to its word on climate change.

“The objectives [of the Climate Change Act] are very clearly set out and there is no indication that we are going to move away from those,” says John David, head of investment fund Rathbone Greenbank Investments. “And there are good reasons for those objectives to stand, beyond climate change, when you take into consideration energy security as well.”

Less certain is the future of the UK’s participation in the EU ETS, for which the UK has legislated its own carbon price floor. 

Kathryn Emmett, senior knowledge lawyer at Norton Rose Fulbright believes that the UK government needs to be clear about how it will address the carbon price floor, especially as the ETS price is languishing at just below €5/tonne.

“There is a potential question mark in terms of the future carbon price floor and UK carbon policy. Industry very much need to have a clear trajectory for the cost of carbon, however we haven’t seen any signals from government on this yet,” she tells Renewable Energy Focus. “The future very much depends on what our EU ETS engagement is and whether we remain part of that scheme, or not.”

In addition, the UK-based component of the renewables industry must also face the wider implications thrown up by Brexit currently being faced by all UK businesses. In the immediate aftermath of the vote, Sterling crashed by 10% and 11% against the euro and the dollar respectively, drastically increasing the price of importing international goods and services. Looking further ahead, the potential restrictions on capital flows into the UK as a result of exiting the EU single market could seriously hamper projects’ ability to access or afford finance.

Indeed, it is not instant doom which characterises the post-Brexit atmosphere, but a pervasive uncertainty. Primarily, this uncertainty centres around Britain’s future relationship with Europe; it is notable that the Leave camp did not address this during the referendum campaign trail. As a result, the Leave vote has thrown up more questions than it answered. Will the UK be able to negotiate a trade agreement, and if so what will that look like? Will the free movement of capital, trade and people continue to stand?  What about the EU’s State Aid legislation? How will the UK and Europe jointly regulate their interconnected energy systems?
 

New energy landscape
 

Officials have taken steps to reassure businesses, setting out a deadline of 2018 for the terms of the exit to be agreed, and creating a new governmental department, the Department for Exiting the European Union, to handle the negotiations.  However, big questions remain over how and when the government triggers Article 50 of the Treaty on the European Union to set the UK’s exit in motion. It is not yet clear whether the move to trigger Article 50 requires a Parliamentary vote and if a motion would even pass, given that the vast majority of MPs campaigned for the Remain camp. In addition, the European Union itself has made clear that it is not prepared to back down on many of the UK’s key “breaking points”, such as freedom of movement, which could stymie a trade deal indefinitely. As such, experts agree that the 2018 deadline may be optimistic and that UK industry should brace itself for another few years of uncertainty.

From an energy perspective, there are a number of potential options for a post-Brexit energy landscape. One is that the UK exits the EU completely, but remains part of the EU’s flagship “Energy Union”. Announced in February 2015, the Union aims to harmonise energy and climate policy across the bloc, as well as integrate energy security and supply, power and gas markets, regulation and research and innovation. According to law firm Norton Rose Fulbright, both the UK and EU are likely to consider this position desirable, on account of the UK’s increasing interconnectivity with Europe. In addition to numerous power and gas links to countries in the European Union, such as Ireland and France, the UK is also linked to those in the wider European Economic Area (EEA) such as Norway. 

“Increasing interconnectivity with continental Europe will necessarily require co-operation with the EU internal energy market in any Brexit scenario,” the firm said in a note. “Because the UK government has been at the forefront of efforts to liberalise and develop cross-border energy markets, we envisage that this cross-border policy direction is likely to endure.”

In that scenario, it would be down to the UK to negotiate a place on the bodies that regulate the Union, ACER, ENTSO-E and ENTSO-G. If the UK cannot do this, it will have to comply with any regulations that emerge as part of the Energy Union, but will not have any say in them.

Alternatively, the UK could choose to take a similar stance to Norway, Iceland and Lichenstein and exit the EU, but remain part of the EEA. If this were to happen, the UK would still be beholden the EU’s stringent State Aid rules which prevent the government from giving direct subsidies. There could be an upside to this scenario, as it would remove the temptation for officials to fund non-renewable power projects for strategic reasons – the Hinkley Point nuclear power station for example – although it would also prevent direct subsidies coming in the direction of the renewables industry too.
 

Potential upsides?
 

But despite the risks, many are pointing to the potential upsides of Brexit as well.  According to the REA’s Court, the increased cost of capital brought about by this uncertain environment may actually fuel a boom for smaller, less capital intensive projects such as district heating or distributed generation.

“The fundamentals have certainly changed,” he says. “Decentralised renewable energy projects could be a lot more appealing for investors, considering they are cheap to finance and easier to deploy.”

“Borrowing a smaller amount of money is going to be cheaper than trying to borrow a large amount of money, certainly for the foreseeable future,” he adds. “It’s certainly not like trying to fund a large £500-700 million gas plant, which is already more difficult than it was. Very little new fossil fuel generation has come online in last five years.”

Others note that for UK exporters, the depreciation of Sterling is likely to boost sales – something which David notes will be seen as a much needed boost for the sector.

“Exporters they may be in a more robust position as their products become cheaper in this new exchange rate regime,” he says. “The domestic renewables sector has already been quite hard hit by the policy changes that we’ve seen over the past few years so unless there are any more local changes one can hope that the sector can be more resilient.”

Others stress that the renewables sector is an international one, which means that Sterling depreciation could hold hidden benefits for the UK’s secondary renewables market.

“There is a lot of interest coming from outside the UK and EU,” says Nicholas Pincott, construction and projects partner at Norton Rose Fulbright. “There are North American pension funds, Japanese funds and a lot of interest from Chinese investors. I don’t see why that would change.”

“If the value of Sterling has gone down that means that if you are a UK entity with assets [to sell] in the UK and asking for a purchase price in Sterling, overseas investors can effectively afford to offer you a higher price.”

David, however, argues that the Sterling situation may be a double-edged sword for international investors in renewables infrastructure, especially if the UK imposes longer-for-lower interest rates to stabilise the currency.

“That kind of investment will become much more attractive as the interest rate outlook changes,” he says. “The higher levels of cash that these investments generate become more attractive to yield hungry investors. On the other hand they will be less attractive to foreign investors because they will  be less keen to have UK Sterling assets.”

However, despite the uncertainty, the industry seems intent on continuing as usual, and nobody is anticipating a significant slump in investment or development activity.

“All the firms I hear from are planning business as usual,” says the REA’s Court. “If you’ve got a project here, you’re getting on and delivering. And if you’re going through preparation stage, you’re continuing to make the project work. There will be a small pause but I think if you’ve got a good project you’ll still be able to go and deliver it.” 

“Any company will be reluctant to take risks and won’t like uncertainty that they haven’t modelled for,” he adds. “A lot will depend on the negotiations and if the government can ensure that the regulations aren’t affected then I think that will increase confidence very quickly and convince industry it can carry on.”

 

ABOUT THE AUTHOR
 

Rachel Parkes is a freelance journalist and copywriter, with expertise in the Energy and Environment fields. She is a long-time contributor to Renewable Energy Focus magazine.

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